Wal-Mart’s Massive Size Makes Sam’s Club Insignificant to its Stock

Wal-Mart (NYSE:WMT), which competes with other retailers like Costco (NASDAQ:COST), Target (NYSE:TGT) and Best Buy (NYSE:BBY), is the largest retailer in the world with more than $400 billion store revenues in 2009.  The retailer is uniquely known for its low prices and operates both retail stores as well as warehouse clubs.

Wal-Mart operates its warehouse club business under the Sam’s Club brand. A warehouse club charges a membership fee to its customers and gives them an opportunity to buy goods at the lowest prices in the market. Although Sam’s Club is second biggest warehouse club retailer in the US after Costco but it contributes a mere 4.5% to the $65 Trefis price estimate for Wal-Mart’s stock.

Below we explain why Sam’s Club’s contribution to Wal-Mart’s stock is so small.

Sam’s Club’s Has Higher Revenue per Square Foot, But Lower Retail Space

We estimate that Sam’s Club’s revenue per square foot, a key operating metric for retailers, was about $586 in 2009, higher than $433 for Wal-Mart US stores and $384 for Wal-Mart international stores. This difference is attributable to discounts that Sam’s Cub offers to its customers.  Such discounts tend to attract bulk buyers and result in higher turnover per unit of retail space.

Despite higher revenue per square foot, Sam’s Club warehouse clubs tend to be smaller compared to typical Wal-Mart stores, thereby limiting their overall revenue contribution to the company.

Number of Sam’s Club Stores is Significantly Fewer than Wal-Mart Stores

We estimate that Sam’s Club’s store count stood close to 600 at end 2009 compared to more than 3,700 US Wal-Mart stores and more than 4,100 international Wal-Mart stores.  Since Wal-Mart has 13x more Wal-Mart stores than Sam’s Club warehouses, the revenue contribution from Sam’s Club stores is small in comparison.

You can modify our forecast below to see how Wal-Mart’s stock depends on number of US Sam’s Clubs.

Sam’s Club Expansion is Expected to Slow Down, While Wal-Mart Stores are Expanding Internationally

We expect Sam’s Club to slow down its expansion because of its shifting focus from opening new stores to remodeling existing stores to increase sales. In comparison, Wal-Mart is expected to continue to expand aggressively in international markets, where it still has limited presence. The company is laying emphasis on international growth, and focusing on increasing sales and output in the markets where it’s already present.

Sam’s Club Has Lower Gross Margins Compared to Wal-Mart Stores

We estimate that Sam’s Club had gross margins of close to 11% in 2009, comparable to that of Costco which operates on a similar business model.  However, these margins are significantly less than the margins fro Wal-Mart’s US or international stores. We estimate that the gross margin for US Wal-Mart stores was around 27% in 2009 and those for international stores was around 26%.

The substantial difference between margins for Wal-Mart stores and Sam’s Club can be solely attributed to Sam’s Club’s business model, which gives customers an opportunity to buy goods at lowest prices in the market and, in return, charges an annual membership fee.

You can see our complete model for Wal-Mart’s stock here.